Many companies are finding new ways to make corporate reporting fit-for-purpose in the 21st century. And purpose is key here. Often obscured by bureaucracy and an increasing number of guidelines, reporting’s objective is really very simple: it exists so that everyone with an interest in an organization’s behavior and performance can understand its purpose, impacts and future prospects.
As revealed in the findings of our global investor surveys, the capital markets are demanding new, more integrated approaches to corporate reporting. But the impetus for change is not coming from outside stakeholders alone. CEOs, CFOs and company directors are all beginning to recognize the potential to better demonstrate responsible business practices across the enterprise while tapping new sources of business value.
Our Climate Change and Sustainability Services (CCaSS) practice expects more companies to begin formalizing efforts around measurable, objective and relevant nonfinancial reporting by defining criteria and measurement requirements for their nonfinancial indicators, establishing robust data management processes, and making the transition to external assurance. That journey will require changes in integrated reporting practices, as value measures mature and companies embrace the potential of a more real-time, digital dialogue around performance.
6 ways to create a more integrated view of capital
The concept of value is broadening to encompass resources that are shared between an organization and wider society. At the same time, emphasis is shifting from tangible to intangible assets. Capital is no longer a singular term; it has evolved into the “multiple capitals approach” in recognition of the range of resources on which organizations rely.
In keeping with the latest thinking from the International Integrated Reporting Council and other leading groups, there are six key types of capital that reporting entities may find useful when considering disclosure practices:
- Natural capital – This includes resources such as water, fossil fuels, solar energy, crops and carbon sinks, which cannot be replaced and are essential to the functioning of the economy as a whole.
- Human capital – The skills and know-how of an organization’s personnel, in addition to their commitment and motivation — which affect their ability to fulfill their roles.
- Social and relationship capital – This encompasses the relationships — and attendant resources — between an organization and all its stakeholders, including communities, governments, suppliers and customers.
- Intellectual capital – This accounts for the intangibles associated with brand and reputation, in addition to patents, copyrights, organizational systems and related procedures.
- Manufactured capital – This encompasses physical infrastructure or technology pertaining to this, such as equipment and tools.
- Financial capital – The traditional yardstick of performance, this capital includes funds obtained through financing or generated by means of productivity.
Value at the core
Publishing an integrated report is not the end of the journey, and it is important that it is not seen as such. Rather, it is one part of a deeper, broader journey leading to a better aligned, more efficient and investor-friendly organization. The market doesn’t need more information; it needs better information. Data is useful only if it tells a clear and full story about an organization. And this story is best generated by integrated thinking. Such thinking is the input; the report is one of its many outputs.
For EY, the key is for each company it works with to orientate around creating something new and tailored. Businesses need to know from the outset that one size does not fit all. This helps them to meet diverse needs, creating award-winning reports in the process. It is still too soon to talk about best practice on integrated reporting, but leading practices are emerging.